TBC of most concern to trustees

Knowing how to comply with the $1.6 million transfer balance cap (TBC) to be introduced on 1 July is the issue SMSF trustees are most worried about as indicated by the five most frequently asked questions of the ATO.

Information provided to selfmanagedsuper by the regulator showed four of the five most frequently asked questions by SMSF trustees to the ATO were in relation to the $1.6 million TBC, with the other query seeking clarification about the capital gains tax (CGT) relief provisions.

One question asked what needed to be done prior to 1 July if a current retirement income stream was being paid from a fund that had more than $1.6 million in the pension account.

The ATO advised two methods of action here, one of which was to reduce the pension account balance by transferring the amount over the $1.6 million limit back to an accumulation account.

“There is also an opportunity between now and 1 July to make additional drawdowns on their pension. Members may in fact be in a position to pay themselves a lump sum,” ATO superannuation deputy commissioner James O’Halloran told selfmanagedsuper.

“The main message I think is people need to take action prior to 1 July and consider their circumstances as after 1 July people can only reduce the amount in excess of the $1.6 million by commuting it. That’s probably am important call to arms.”

The tax office was also asked what would happen if a pension account was above $1.6 million after 1 July, to which it replied a commutation of the excess would have to be made and where the member had not directed the trustees to reduce the pension account by the amount required, the ATO would be issuing a commutation authority to the fund.

A follow-up query was about what would happen if the trustees did not comply with a commutation authority. The ATO indicated here the fund would lose its entitlement to exempt current pension income (ECPI) for that particular income stream. It added the existing pension would need to be commuted and a new one established if the member wanted an income stream that qualified for ECPI treatment.

The final question in regard to the TBC was seeking general guidance as to what trustees needed to do to be prepared for the introduction of the new measure.

The issues the ATO highlighted here were for trustees to be aware of each member’s total superannuation balance across all of their super interests, how the CGT relief provisions might apply in the event of necessary commutations, whether or not the fund uses the segregated method when accounting for assets, to take into account the fund’s pension asset values, and knowing cap breaches of under $100,000 will be disregarded if rectified within six months.

The non-TBC related question was about how to make an election for CGT relief, with the regulator emphasising the need for the trustees to notify it of this intention by completing the CGT schedule on or before the day the SMSF’s 2016/17 return is due to be lodged.

O’Halloran pointed out any action taken in the lead-up to 1 July had to be contextualised around the fund and member’s circumstances.

“While we obviously encourage people to consider their circumstances, as either advisers or trustees, many of the measures will not necessarily impact a lot of SMSFs. In other words be informed, but don’t necessarily assume there’s immediate action that needs to be taken,” he advised.

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